The Bank of England (BoE) is under increasing pressure as experts warn that further interest rate cuts could trigger another surge in inflation, potentially unsettling the fragile economic recovery.
While Governor Andrew Bailey remains confident that inflation is under control, former policymakers caution that the UK economy could face renewed turmoil if rates are lowered too quickly.
According to Devon Live, analysts are concerned that rising wages and persistent cost pressures may fuel a longer inflationary cycle, complicating the BoE’s path forward on monetary policy.
Bank of England Faces Growing Uncertainty Over Interest Rate Strategy
The debate over interest rate cuts has intensified as policymakers attempt to strike a balance between supporting economic growth and containing inflationary pressures.
The BoE has been reducing interest rates in an effort to ease financial conditions, but growing evidence suggests that these cuts might come at the risk of rekindling inflation.
Experts warn that the central bank must carefully assess economic indicators before proceeding with further reductions, as premature action could lead to unintended consequences.
Experts Urge Caution on Rate Reductions
Concerns stem from inflation unexpectedly rising to 3% in January 2024, surpassing forecasts. Deutsche Bank now predicts inflation could climb as high as 4.25% by summer, driven by rising employment costs and businesses increasing prices to offset higher taxes and wages.
Former Monetary Policy Committee (MPC) member Martin Weale expressed concerns over wage growth and service price trends, warning of potential economic instability.
DeAnne Julius, another former MPC member, pointed out that businesses will likely raise prices further when the national insurance increase and minimum wage hike take effect on 1 April 2024.
“Businesses that can raise their prices are going to do so to try to cover at least part of the additional cost they’re facing starting April 1, when the national insurance increase comes in and the minimum wage goes up,” Julius told Bloomberg.
Inflation Risks Could Delay Rate Cuts
Bank of England has been cutting interest rates since August 2023, with financial markets anticipating at least two more reductions in 2024.
However, rising private-sector wages, currently exceeding 6%, alongside increasing inflation expectations, has led some analysts to warn that further rate cuts could be premature and risky.
Deutsche Bank has revised its inflation forecast, now predicting a rise to 4.25% by summer 2024, a level that could force the BoE to reconsider its planned rate cuts.
Sanjay Raja, the bank’s UK chief economist, suggests that interest rate reductions should be “more backloaded than frontloaded”, meaning the BoE may have to delay cuts further into the year rather than proceeding with them early.
Deputy Governor Dave Ramsden has also expressed concern, highlighting that stronger-than-expected wage settlements could contribute to inflation rather than helping to stabilise it.
He also pointed to weak productivity, which restricts the economy’s ability to grow without driving up prices, further complicating the Bank of England’s approach to interest rate decisions.
Some policymakers worry that inflation could mirror past trends, where the post-pandemic “transitory” inflation surge ended up lasting much longer than anticipated. Former MPC member Martin Weale warns that multiple factors, including wage growth and service price trends, are creating a negative inflationary cycle.
If this continues for the next couple of months, then I would be nervous about making further cuts, – Weale said
stressing that inflationary pressures may persist longer than expected.
While Governor Andrew Bailey and his team insist that the latest rise in inflation is primarily due to temporary factors, particularly energy costs, growing concerns from analysts and former policymakers suggest that the central bank may be underestimating the risks.
If inflation continues to climb, the Bank of England may be forced to pause or even reconsider its rate-cutting cycle to prevent economic instability.
